Debunking The Most Common Myths About CPM Software in FP&A
It’s no secret that finance leaders in recent years have been under a lot of pressure to adopt sophisticated technologies in order to modernize their approach to their field of work. CPM tools are a critical component of this corporate phenomenon, but are unfortunately often misunderstood. Since the dawn of digitization in corporate finance, there has been a lot of misinformation spread surrounding the subject of CPM tools and their proper use, in addition to the best practices in incorporating technology into corporate finance. The following article will give a concrete definition of CPM software, dispel some common misconceptions about their use, and list out the best practices in utilizing the latest technologies as a finance worker.
The Significance & Advantages of CPM Solutions
CPM systems originated and matured in large organizations. However, there are many reasons that CFOs of midsize and private-equity-owned companies should consider adopting them. The reasons are as follows:
1. Complex Architectures:
Some PE-owned companies have more complex architectures than even the largest publicly held companies. PE-owned companies typically create value via carve-outs, roll-ups, and other types of acquisitions. These structures result in complex technical architectures, multiple general ledgers, various back-end operational systems, and numerous financial systems. The CFO is charged with instituting and standardizing the controls and processes required to support internal and external financial reporting and projections.
The advent of the cloud has driven down the price point for many subscription-based solutions, including CPM. As a result, mid-market companies can now take advantage of tools historically available only to enterprises, while realizing meaningful ROI from their implementation.
3. Rapid Rate of Change:
Given the focus on value creation, the rate of change within a PE portfolio company or an acquisitive midsize company can far exceed that of larger organizations. PE-backed companies are in acquisition mode, bringing in new charts of accounts, new organizational alignments, new product lines, and new sales channels. Finance must also act on deal origination and integration within a more accelerated time-frame to meet the demands of the financial sponsor.
4. Lean Teams and Limited Resources:
Many companies have limited resources. CPM solutions address limitations by minimizing manual data collection, organization, and consolidation processes and maximizing higher value-add functions such as modeling projections and analyzing results to inform decision-making.
5. Balancing Operational Autonomy with Controls:
All kinds of organizations need technology systems that empower them to act with autonomy in a non-disruptive capacity while simultaneously giving the CFO the stewardship and control the office of finance requires to execute its job.
Addressing Myths & Misconceptions
1. CPM Focuses on Financial Data, Not Operational Data
There is an ounce of truth to this statement; however, it does understate the significance of operational data. There are going to be data/reporting needs that are better supported by alternative platforms to CPM. That said, the supplemental operational data that supports the financials and is leveraged as part of a driver-based planning/forecasting approach should be brought into the CPM solution. Even more so than CFOs at large, multi-billion-dollar organizations, CFOs at midsize and private equity-backed companies need to be just as fluent in the operational metrics as they are in the financial ones.
The required ability to model multiple financial scenarios (best, worst, expected cases) can only happen when operational metrics are introduced and correlated with the financial lines they drive. By layering operational metrics side-by-side with the financials, finance is informed and empowered to have meaningful dialogue with various functional departments.
2. Implementing CPM Takes Too Much Time to Realize Value
To expedite a CPM project (faster, less effort, minimal cost), CFOs should:
Employ a “configuration” versus “customization” based solution design approach
After MVP deployment, approach the project from a phase-based implementation perspective, layering in additional functionality
Scope the project from a minimal viable product (MVP) perspective so that the organization can begin realizing the solution’s value more quickly
Design for financial consolidation and planning/forecasting during a “common design phase” upfront, but deploy each in a prioritized fashion
Have the source-to-target mappings complete before engaging professional services. (Likewise with other required mappings: organization/entity, product, channel, etc.)
Remember, CPM is a purpose-built platform to support financial consolidation, budgeting/forecasting, and the reporting required to support these processes. So resist the temptation to turn the CPM system into an all-encompassing platform for every reporting need
3. Neglecting CPM Systems While Migrating to a Single ERP
Consolidating multiple general ledgers into a single enterprise resource planning system is time-consuming, expensive, operationally disruptive, and produces numerous change management challenges and risks. Private equity-backed CFOs in particular often inherit a complex architecture of financial systems. Untangling these systems, and the processes they support, to migrate into a single ERP can be impractical, at best, and counter to value creation, at worst.
CPM solutions allow business unit autonomy (multiple G/L environments) while simultaneously empowering finance with the necessary controls to standardize the close/consolidation process, planning/forecasting, and financial reporting.
4. The Integration of Acquisitions Will Be a Challenge
While they can support some rudimentary functions, G/Ls often fall short in support of the following:
The financial close/consolidation process (inter-company transfers, account reconciliation, transaction matching, task management).
The planning/forecasting process (driver-based planning, scenario modeling, rolling forecasts).
Reporting needs (dashboarding, ad-hoc, drill-down and drill-through, analysis)
Additionally, although spreadsheets offer more flexibility than a G/L in support of the functions listed above, they cannot inherently enforce standards and controls. Moreover, multi-spreadsheet workbook logic can be challenging to construct, deconstruct, and append/modify when a business need, like an acquisition, necessitates it.
Acquisitive companies aggressively scaling and integrating new add-ons as part of their value-creation strategy benefit significantly from the deployment of CPM solutions.
5. CPM Solutions Require Significant Technical Support
Modern CPMs are cloud-based solutions and, therefore, less unwieldy than those of previous generations. Their technical infrastructure is maintained by the software vendor as part of the software-as-a-service model. Thus, CPM solution administration is best supported by resources in finance and accounting that have good business familiarity and light technology skills. Steady-state support generally involves a part-time role. However, it can increase to full-time during close cycles and budgeting and forecasting processes. IT should get involved when new data sources need to be integrated (for example, when trial balance data needs to be sourced from a new G/L as part of an acquisition). Outsourcing options exist whereby third-party firms will administer the CPM solution in a managed-services capacity.